Tag Archives: SEC

The Securities and Exchange Commission (SEC) pressed formal charges against Zachary Coburn, the founder of cryptocurrency trading platform EtherDelta, for not registering his company as a national securities exchange.

Required to Register

According to an official press release, the SEC has taken action against the founder of digital token trading platform EtherDelta, Zachary Coburn.

According to the Commission’s order, EtherDelta constitutes an online platform for secondary market trading of ERC20 tokens — most of which are usually issued through an initial coin offering (ICO). Furthermore, the SEC has found that almost all of the orders which have been placed through the platform have taken place after its 2017 DAO Report. According to it, certain digital assets, DAO tokens included, are considered securities and, hence, their trading is subject to the Commission’s requirement that exchange register or qualify for an exemption.

According to Stephanie Avakian, Co-Director of SEC’s enforcement arm, EtherDelta did neither of those, stating:

EtherDelta had both the user interface and underlying functionality of an online national securities exchange and was required to register with the SEC or qualify for an exemption.

Fines and Penalties Already Paid

The release also says that Zachary Coburn has already paid $300,000 in disgorgement, $13,000 in prejudgment interest, as well as a $75,000 penalty.

However, he hasn’t admitted to anything and the investigation is continuing. Still, the SEC recognizes his cooperation, stating that it may have prevented an even greater penalty.

According to Steven Peikin, Co-Director of the SEC’s Enforcement Division, existing legislation needs to be followed carefully in order to protect investors in times of “significant innovation.” Noted Peikin:

We are witnessing a time of significant innovation in the securities markets with the use and application of distributed ledger technology. But to protect investors, this innovation necessitates the SEC’s thoughtful oversight of digital markets and enforcement of existing laws.

Do you think the SEC has merit to press charges against EtherDelta? Don’t hesitate to let us know in the comments below!

Despite the growing importance of the cryptocurrency industry, the US government’s position on crypto regulation remains frustratingly opaque. According to a D.C. insider, a movement towards real regulation or greater regulatory guidance is still quite far away.

Had drinks yesterday with a friend who’s deeply connected in DC.

Me: “what do you hear about crypto on the Hill?”Him: “nothing.”Me: “nothing at all?”Him: “literally nothing. Nobody talks about it. Never comes up.”

Regulatory Uncertain

Questions about how the government intends to regulate the crypto industry abound. For example, it is still unclear to many investors whether crypto regulation will ultimately come from the SEC or the CFTC.

While there remains no widespread movement in Washington towards reforming the crypto regulatory environment, there are encouraging signs that pockets of Congress are beginning to take interest in the cause.

Beginnings of Congressional Action?

On September 24th, Rep. Warren Davidson (R-OH) hosted industry leaders from Wall Street, Silicon Valley, and the crypto industry for a roundtable discussion on the crypto regulatory environment. Davidson’s roundtable, titled “Legislating Certainty for Cryptocurrencies,” was held at the Library of Congress. Roughly eighty thought leaders from the private sector attended the roundtable, with multiple members of Congress and their aids in attendance as well.

Davidson stressed the importance of industry being involved in crafting the government rules that will eventually govern the crypto space.

Congressional Letter to the SEC

Following the roundtable, Davidson and fourteen other Representatives issued a public letter to SEC chairman Jay Clayton requesting that the SEC issue clarification on whether Initial Coin Offerings are considered security sales. The Representatives used the letter to express concern that all tokens were being treated as securities, regardless of whether the designation was applicable or relevant. The letter stated:

Therefore, we believe is important that all policy makers work toward developing clearer guidelines between those digital tokens that are securities, and those that are not, through better articulation of SEC policy, and, ultimately through formal guidance or legislation.

The letter went on to express concern that existing guidance on SEC policy is being conveyed solely through enforcement action, leading market participants forced to try to divine SEC policy through the scope of its enforcement actions. The letter continued:

Additionally, we are concerned about the use of enforcement actions alone to clarify policy and believe that formal guidance may be an appropriate approach to clearing up legal uncertainties which are causing the environment for the development of innovative technologies in the United States to be unnecessarily fraught.

New Legislation Begins to Emerge

While no major legislation has been introduced to cover the crypto industry, U.S. Representative Tom Emmer (R-MN) has introduced a slate of three bills designed to encourage support for the crypto industry. Emmer’s bills propose only minor changes to how cryptocurrency is regulated in the U.S.

Concerns about the regulatory status of various crypto projects have encouraged many entrepreneurs and firms to decamp to more stable regulatory climes. For example, Switzerland’s “light-touch” regulatory policy has fueled the dramatic growth of the industry in the country.

While it is encouraging to see the government finally begin to take interest in the crypto industry, the Congressional letter stressed that SEC guidance would take time to fully emerge and develop. Start-ups and entrepreneurs hoping for greater regulatory clarity will likely still have a long time to wait.

Will U.S. regulators eventually wake up? Let us know in the comments below!

One of the last major hurdles to the widespread institutional adoption of cryptocurrency is the issue of custody — where to securely store all those high-paying clients’ assets. Fortunately, several companies are currently working on a solution to this piece of the puzzle.

A Universal Question

Custody is a question that perhaps anyone who has owned crypto has considered — or failed to at their own peril. I.e., Where am I going to keep my Bitcoin (BTC) 00 — or other tokens —safe?

In the early days, some were happy enough to leave their crypto in the safe hands of the exchange where it was bought. Until a series of high profile hackings highlighted just how untrustworthy those hands may be.

The crypto community possesses online desktop and mobile wallets, hardware wallets, and even paper wallets, depending on how sensible/paranoid we are. Now imagine dealing with millions of dollars worth of someone else’s money.

Assured Security

Institutional investors are accustomed to having their assets safely stored or FDIC insured. For institutions holding assets of over $150 million dollars, use of a third party custodian is an SEC requirement. So for larger companies, self-custody (managing their own private keys) is not even an option.

Smaller retail and family offices may utilize offline cold-storage methods or even keep assets on an exchange. But there is a clear need for some entity to fill the role of secure, regulated custodian. Managing private keys in the way that Wall Street custodians manage traditional asset classes.

Regulatory Scrutiny

One of the companies aiming to fill that niche is BitGo. Yesterday BitGo became the first regulated service for storing digital assets when it received a state trust company charter from the South Dakota Division of Banking.

This is the missing piece for infrastructure — it’s a treacherous environment today… Hedge funds need it, family offices need it, they can’t participate in digital currency until they have a place to store it that’s regulated.

An influx of institutional investors could be the exact boost the current crypto-market needs. For the SEC to get on board and realize this vision, there really is no alternative to a regulated custodian service.

The SEC has said no to applications for nine different Bitcoin ETFs. Applications came from ProShares, Direxion, and GraniteShares.

Nine applications to list and trade different Bitcoin ETFs were rejected by the SEC, according to threedifferentreleases dated August 22nd.

The regulatory agency (predictably) rejected five proposed ETFs from Direxion, two from Proshares, and two from GraniteShares. The SEC cited concerns over fraud and manipulation as the main reasons for the rejection.

The official deadline for the ProShares decision was August 23, while GraniteShare’s offering was slated for September 15. Many were curious to see how the SEC’s decision would play out, as any sort of positive news would certainly send Bitcoin price 00 upwards.

A Flurry Of Rejections

In each report, the SEC listed specific reasons that led them to reject each application. But in all three releases, the agency wrote:

[T]he Commission is disapproving this proposed rule change because, as discussed below, the Exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.

The SEC also noted how none of the applications convinced them that the Bitcoin futures market was of “significant size.” According to the SEC, this failure is important because the applications have “failed to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient, and therefore surveillance-sharing with a regulated market of significant size related to bitcoin is necessary.”

However, the SEC did note:

Its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment.

Echoes of Previous Rejections

The latest round of rejections by the SEC is nothing new to cryptocurrency enthusiasts who are excited about the idea of a Bitcoin ETF.

Last year, the agency rejected an ETF proposal from Cameron and Tyler Winklevoss, known as the Winklevoss Bitcoin Trust. In July, the SEC rejected a rule change proposal the two brothers submitted after the initial rejection.

The agency said they denied the proposal due to concerns about investor protection. At the time, the regulatory body pointed out how Bitcoin was subject to fraud and manipulation carried out from offshore markets that were unregulated.

Now, all eyes are set to wait for the SEC’s decision about the CBOE Bitcoin ETF proposal. Some legal experts think the SEC will probably hold off until 2019 on making a decision about their proposal. In the meantime, CBOE has been fairly active in working with the SEC to mitigate concerns.

What do you think about the SEC’s latest rejections? Will the commission eventually approve a crypto ETF? Let us know in the comments!

The US Securities and Exchange Commission (SEC) this week approved plans for public comment which would make it easier for investment companies to bring new exchange-traded funds (ETFs) to market. Could these new rules enable the creation of more blockchain-based ETFs?

The SEC’s proposed changes would remove the need for many ETFs to seek special permission from the SEC and is targeted towards what the industry describes as “plain vanilla” ETFs. The proposal met with unanimous approval from SEC commissioners.

New Rule Will Apply to Most ETFs

SEC Chairman Jay Clayton says the new rule would “level the playing field” and that:

The proposed rule would cover most ETFs operating today and all similar ETFs that sponsors may seek to launch in the future.

Clayton did qualify his statement by explaining the new rule wouldn’t cover all products, some would require greater scrutiny. Complex leveraged products sometimes called “exotic” ETFs, for example, would not be eligible for the new process the rule would create.

In theory, the change could open up the market for investment firms offering blockchain-based ETFs. That is, ETFs which – instead of investing in cryptocurrencies themselves – invest in companies developing, or based on, blockchain technology. Blockchain-based ETFs can be viewed by traditional investors as a less risky way to capitalize on the new blockchain economy.

In practice, there has been no clarification as to whether blockchain-based ETFs would require “greater scrutiny.” They might not if they meet the industry definition of “plain vanilla,” simply based for example, on share options or bonds with no “exotic” features like extra rules for meeting a certain price point before becoming active.

Impact on Bitcoin-based ETFs

Though the SEC has yet to specifically mention blockchain or bitcoin-based ETFs in reference to these discussions it is almost certain that bitcoin-based ETFs, which invest directly in cryptocurrencies themselves, are unlikely to see any favor from the proposed new rules.

The SEC is currently reviewing applications for a number of bitcoin-based ETFs and is holding back on the approval due to unanswered questions pertaining to the cryptocurrency markets and the way coins are valued and regulated. According to reports, the SEC has rejected over a dozen applications already.

The approval of a bitcoin-based ETF would be significant, with some experts predicting this might now happen sooner rather than later.

Indeed, the SEC is seeking public feedback on an application by CBOE Global to list an ETF with bitcoin shares backed by VanEck and SolidX in documents published on the SEC website on June 26th, 2018. The move by the SEC could well signify a change in its attitude towards ETFs that invest in cryptocurrencies.

If the new rules proposed by the SEC are implemented it will be interesting to see whether blockchain-based ETFs are treated in the same way as ETFs investing in more traditional companies and technologies. If the SEC is actually targeting “plain vanilla” ETF structures with the more relaxed approach this could be the case.

The SEC could also decide that blockchain-based ETFs require “greater scrutiny,” however, the loosening of the regulatory pressure on the $3.6 trillion USD market for ETFs still marks progress which could eventually see both blockchain-based and bitcoin-based ETFs as common features of institutional markets.

In the West, crypto markets continue to battle with the regulatory uncertainty as the SEC and other regulatory bodies take their time to decide which camp they sit on. At the same time, things are not much rosier in the East either where China is yet to warm up to cryptocurrencies.

Blockchain has been around “long” enough to show the proof of concept in that by utilizing blockchain it is possible to streamline a number of processes, both on the governmental and also corporate levels. This then has prompted an exponential rise in fintech start-ups looking to challenge the status quo and disrupt the standard ways of storing, organizing, and extracting data sets. However, the actual implementation of blockchain technologies across much of Western Europe and even the US has been constrained by the regulatory uncertainty.

On the one hand, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are yet to put a fundamental framework forward to appease concerns surrounding utility vs security token model. While in Europe, an introduction of General Data Protection Regulation (GDPR), which is perfectly suitable for blockchain applications, is being rushed through by compliance and HR departments with such haste that blockchain is far away on their radar.

In Blockchain We Trust

Russia is an interesting case when it comes to the world of ICOs. On the one hand, it is a great place to source technical experts for your blockchain related ventures. The price tag might be astronomical but at least you know what you are getting for the labor and that is quality, reliability and of course security. So, with one piece of the puzzle sorted comes the tricky bit, finding a suitable business partner and this is where things go wrong… really wrong.

One of the most depressing and worrying statistics that has come out of the Russian Association of Cryptocurrencies and Blockchain (RACIB) is that around half of the ICO funds in the country that were raised in the past year – amounting to $300 million – have gone to pyramid schemes.

Economic and political uncertainty, together with numerous corruption scandals has really dented investor appetite for projects in the country. It is very much high-risk, high-reward based game when it comes to investing in Russia and when combined with the volatile nature of the currency, this perception is unlikely to change anytime soon. The regulation and oversight by the government can help alleviate some of the concerns relating to fraudulent activities but at least for now, the crypto community is yet to “sanction” Russian projects altogether.

In the meantime, the likes of Blackmoon (BMC) will remind budding entrepreneurs and investors of the success stories and there is, of course, hope that the government, which is actively looking at ways to promote and integrate digital economy, will not be overly involved in regulation aspect.

On the subject of regulation, it was reported that the Russian State Duma’s Committee for Legislative Work will support the first reading of an initiative that will add the basic norms of digital economy to the Russian Federation Civil Code. The initiative itself does not mean that digital currencies will now become a legitimate means of payment and instead, a separate law developed by other regulatory bodies, will outline conditions for using digital currencies as a payment method. The initiative will also look to treat a digital confirmation by a user in a smart contract is equal to his written consent.

What Does Russia’s Future Hold?

Over the course of 19-20 May 2018, Moscow hosted one of the largest cryptocurrency summits of 2018, with over 200 speakers and over 3000 participants taking part in the event. While the event may not carry the same weight as Consensus, which took place earlier this month, or d10e, it was an important event for the country that stands at a crossroads with the technology. The decisions that will be made by the government need to be made in the spirit of blockchain and with the aim to further technological, as well as economical, advancement as opposed to being the means to destabilize the Dollar.

The commissioning of the crypto-rouble is not far-reaching enough. Anyone looking for inspiration should turn to Dubai and their smart-city plans. According to Smart Dubai, which is conducting government and private organization workshops to identify areas that will benefit from the overhaul, the strategy could save 25.1million man hours, equivalent to $1.5 billion in savings per year for the emirate. It has been noted that the fast majority of improved efficiency will come from moving to paperless government.

What do you think of the latest developments in Russia and can it reform and lead the way in providing a sound base for crypto projects?

In a surprising turn of events, the US Securities and Exchange Commission has launched its own initial coin offering dubbed HoweyCoins.

‘A Hot Investment Opportunity’

Anyone looking for a hot new initial coin offering (ICO) should look no further than the US Securities and Exchange Commission’s brand new token sale for HoweyCoins. States the regulatory authority in an official press release:

If you’ve ever been tempted to buy into a hot investment opportunity linked with luxury travel, the Securities and Exchange Commission has a deal for you.

Check out the SEC’s Office of Investor Education and Advocacy’s mock initial coin offering (ICO) website that touts an all too good to be true investment opportunity. But please don’t expect the SEC to fly you anywhere exotic—because the offer isn’t real.

Unsurprisingly, the SEC isn’t actually launching its own token sale. Rather, the independent agency of the United States federal government has set up a mock website in order to educate investors about the perils of investing in fraudulent ICOs.

Clicking “Buy Coins Now” on HoweyCoins.com — a tongue-in-cheek reference to a landmark US Supreme Court decision in 1946 — will not actually sell you coins, but rather offer tools and advice from the SEC and other financial regulators.

The website has reportedly been set up to protect regular investors, and “features several of the enticements that are common to fraudulent offerings, including a white paper with a complex yet vague explanation of the investment opportunity, promises of guaranteed returns, and a countdown clock that shows time is quickly running out on the deal of a lifetime.”

Fraudsters can quickly build an attractive website and load it up with convoluted jargon to lure investors into phony deals. But fraudulent sites also often have red flags that can be dead giveaways if you know what to look for.

The rapid growth of the ‘ICO’ market, and its widespread promotion as a new investment opportunity, has provided fertile ground for bad actors to take advantage of our Main Street investors. We embrace new technologies, but we also want investors to see what fraud looks like, so we built this educational site with many of the classic warning signs of fraud. Distributed ledger technology can add efficiency to the capital raising process, but promoters and issuers need to make sure they follow the securities laws. I encourage investors to do their diligence and ask questions.

HoweyCoins.com does indeed look a lot like the vast majority of websites offering ICOs and may be interpreted as a clever and funny way to educate investors against fraudulent schemes — as opposed to simply providing bullet points on a government website.

What do you think of the SEC’s new mock ICO? Do you think this is a positive move in the education of investors against fraudulent ICOs and bad actors in the cryptocurrency space? Be sure to let us know in the comments below!

While the U.S. Securities and Exchange Commission dishes out subpoenas to cryptocurrency projects like a generous house doles out candy on Halloween, TechCrunch founder Michael Arrington’s $100 million cryptofund has also come under investigation.

‘They Just Have to Figure out What They Want.’

TechCrunch founder Michael Arrington’s $100 million cryptofund has been subpoenaed by the U.S. Securities and Exchange Commission — which is no skin off Arrington’s back. He told CNBC on Thursday:

We received a subpoena. Every [crypto]fund I’ve talked to has received one. That’s fine. They just have to figure out what they want. They need to set up rules so we can all follow them, and the market is begging them for that.

Too Much Confusion

Indeed, the SEC apparently has no idea exactly what it wants, having already indicated that regulations in regards to securities laws do not apply to digital coins. The confusion created by the SEC has even caused many cryptocurrency firms to ban U.S. investors from getting involved in the projects.

Meanwhile, the SEC’s New York, Boston, and San Francisco offices have been issuing subpoenas like it’s their job, in an attempt to learn as much as possible about the burgeoning billion-dollar industry. Said Jason Gottlieb, partner at Morrison Cohen, who is defending PlexCorps against charges of fraud:

Clearly it’s a coordinated, grand investigation. I would expect it’s going to continue throughout this year.

Goodbye, USA

According to Arrington, the negativity and confusion created by the SEC is driving innovation away from the United States. He told CNBC:

That’s a shame, The U.S. has just frozen itself. The stuff coming out of Asia is uniformly high quality.

The US is not the only country struggling with regulation, of course. South Korea has ping-ponged back and forth while China has outright banned Initial Coin Offerings. Japan has somewhat successfully implemented a licensing system for cryptocurrency exchanges, while European financial authorities in Germany and France are calling for a global crackdown.

Still, the US remains in the spotlight and risks driving out innovation while the SEC dithers. Says William Mougayar, author of The Business Blockchain:

I hope they don’t go [down] the slippery slope of trying to classify tokens because it’s a grey zone throughout. Rather, focus on requiring disclosures that are well-defined, while not being too restrictive yet.

For now, we’ll just have to wait and see.

What do you think about the SEC’s subpoena-issuing spree? Do you think effective, innovation-supporting regulation will come from its investigation? Let us know in the comments below!

Goldman Sachs-backed startup Circle made waves earlier this week when it acquired cryptocurrency exchange Poloniex. A couple of experts share their thoughts on the implications for the soon-to-be first compliant US crypto exchange and its customers.

Most Crypto Exchanges ‘Over-Regulate Themselves’

As the dust settles on Circle’s acquisition of Poloniex, U.S. regulators are keeping a close eye on KYC/AML compliance of cryptocurrency exchanges.

Joseph Weinberg, OECD Think Tank Special Advisor and Chairman of Shyft, a blockchain protocol that will create a new standard for the KYC/AML mandates, shared his comments with Bitcoinist. He states:

Most crypto exchanges that are processing fiat to crypto transactions are very compliant and, in some cases, even more so than banks. It all really depends on jurisdictions and the compliance policies given by countries to crypto exchanges.

He continued:

For crypto exchanges, the challenge lies in how little formal guidelines there are from regulators. As a result, most of the industry has been doing self-compliance in absence of clear procedures. To err on the safe side, crypto exchanges over-regulate themselves. For example, most exchanges ask for passport verification in order to confirm users’ identities, whereas most banks only require government-issued IDs, such as drivers licenses.

Interestingly, Circle acquired the crypto exchange over a year after announcing it was shifting focus from Bitcoin to blockchain-based services. At the time, the company informed its Bitcoin customers that they can can cash out or transfer their balances to Coinbase, if they wished to continue to use the cryptocurrency.

So why did Circle decide to jump back into the crypto game?

It appears that Poloniex was struggling to keep up with the unexpected surge in new users as prices skyrocketed in the second half of 2017. Additionally, being based in the United States, the company also had to keep up with rising compliance costs as it rolled out its new KYC policies late last year.

Weinberg explains:

In the past, Poloniex had a lot of issues with onboarding new users and properly building out its KYC process, mainly due to the large amounts of time it takes to verify users. Given the level of KYC that exchanges force themselves to go through, scaling compliance is almost a separate product that the exchange has to build out.

According to him, this is where Circle comes in with their KYC/AML expertise. He says:

Through this acquisition, Circle will deploy more people to help handle compliance—more employees to build and process KYC due diligence faster. This is the same type of issue traditional banks have when it comes to scaling. Compliance costs keep multiplying, and yet, they aren’t always found to be effective.

The SEC Is Watching

Meanwhile, another takeaway has been put forth by Nathaniel Popper, author of Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money.

Just got this slide from a confidential Circle presentation. It does more to explain Circle’s acquisition of Poloniex than anything I have seen today. pic.twitter.com/gRXxDeXvxl

Popper noted on Twitter that the SEC informally suggested to Circle that no enforcement action will occur if the Boston-based startup “cleans up Poloniex and turns it into a regulated exchange.” He adds:

The SEC seems to be saying here that it’s okay if you broke the rules, as long as you get acquired by a legitimate player before we crack down on you.

The question now seems to be whether the SEC will apply this same thinking to other virtual currency exchanges if they are acquired by large players.

In addition to facilitating compliance, Circle also announced that it will add fiat bridges and expand operation to other markets. Namely, the company promised to explore “USD, EUR, and GBP connectivity that Circle already brings to its compliant Pay, Trade, and Invest products.”

This would imply that the exchange must also become compliant and answer to regulators from across the pond, who are currently scratching their heads on how to approach cryptocurrencies without stifling innovation in the process.

Therefore, regulators in the U.S. and abroad could be playing the carrot and stick strategy by providing an incentive for crypto exchanges to get acquired by the large players, such as Goldman Sachs, before a potential crackdown. Admittedly, this could also be a clever way for traditional finance to not only appear innovative through association but also assimilate would-be future competitors.

If true, the strategy may be futile and usher in the Streisand effect to boot. As technology advances, so do new methods of exchanging cryptocurrency. Therefore, assimilating centralized exchanges like Poloniex could force users to migrate en masse to decentralized exchanges and further bolster their development.

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